Fitch Affirms Anchorage, AK's Sewer Revs at 'AA'; Outlook Stable
SAN FRANCISCO--()--Fitch Ratings has affirmed its 'AA' rating on the following Municipality of Anchorage, Alaska (the municipality) revenue bonds:
--$65.2 million wastewater revenue bonds, series 2004 and 2007.
The Rating Outlook is Stable.
The bonds are secured by net revenues of the city's sewer utility (the utility) after payment of maintenance and operations expenses.
KEY RATING DRIVERS
LARGE SERVICE AREA: The utility provides essential wastewater service to 95% of the Municipality of Anchorage, the economic center of the state of Alaska.
GOOD FINANCIAL MANAGEMENT: The utility's financial performance is consistently good and provides adequate margins for revenue bondholders prior to payment of subordinate lien state loans and the payment in lieu of taxes (PILOT) to the municipality. The utility's flat fee structure for residential customers, who provide about 70% of revenues, creates great revenue stability.
SOLID FINANCIAL PERFORMANCE: Senior debt service coverage averaged a very strong 4.4 times (x) debt service over the three years ended 2011. All-in coverage after the utility's PILOT was adequate, averaging 1.3x over the period. Liquidity decreased to a just-adequate 126 days of operating cash in 2010 before improving to 140 days in 2011.
REGULATED RATES: Rates are low, although rate flexibility is tempered by the regulation of the utility's rates by a state regulatory agency, the Regulatory Commission of Alaska (RCA). The utility has a solid record of securing regulatory approval of significant rate increases.
SIGNIFICANT DEBT BURDEN: Debt levels are high and will nearly double upon the financing of 75% of the five-year capital improvement plan (CIP). The utility's ongoing use of significant debt financing for renewal and replacement capital needs is a weakness, potentially reducing future debt capacity that may be needed to address elevated regulatory treatment requirements.
ENVIRONMENTAL REGULATORY CONCERNS: The utility's main treatment plant treats wastewater to primary standards, which is increasingly rare and requires ongoing approval of treatment waivers from the Environmental Protection Agency (EPA). Capital needs and debt levels would rise significantly if the EPA required the utility to upgrade to full secondary treatment, which could put downward pressure on the rating.
The utility provides wastewater services to 56,100 customers, which includes most of the Anchorage Bowl and two small outlying communities. Growth is modest at less than 1% of connections annually. The service area is the economic and population center of the state of Alaska. Its economy outperformed the nation over the past five years of recession and sluggish growth. In addition, the unemployment rate was well below the state's and the nation's at just 5.7% in May 2012.
Financial performance has been strong with Fitch calculated debt service coverage of revenue bonds at 5.1x in fiscal 2011 and all-in debt service coverage (including the subordinate state loans) at 2.0x. When the PILOT to the municipality is included, all-in debt service coverage falls to 1.5x. The utility's all-in coverage is adequate, but does not leave a great deal of excess funds to be invested in capital, increasing reliance on debt financing.
Liquidity was adequate at $9 million, or 140 days of unrestricted cash and investments, at the end of 2011. Reserves have decreased from prior robust levels (better than 200 days historically) because the utility imposed a smaller-than-usual rate increase in 2010 in order to offer rate relief in the aftermath of the recent recession without cutting back on capital spending. Even at the reduced level, Fitch believes that liquidity remains adequate for the utility's financial risk profile. However, further declines in liquidity could put downward pressure on the rating.
Existing debt per customer of $2,445 in 2011 was high compared to the median of $1,561 for 'AA' rated utilities. Furthermore, debt per customer is expected to approach $4,000 by 2016. The utility's CIP is primarily related to the repair and replacement of existing infrastructure. The five-year CIP has an estimated cost of $161.7 million and will be 75% debt funded. This represents a high degree of debt financing, which will increase the system's already high debt burden.
Currently, the utility operates its largest wastewater treatment plant (the Asplund plant; 58 million gallons per day capacity) under an expired 301(h) waiver of the federal Clean Water Act, allowing the facility to treat waste to advanced primary standards. The utility submitted its application for another five-year waiver in 2005, but continues to await a decision from the EPA.
The utility discharges to the Cook Inlet, and the Cook Inlet Beluga whale was listed an endangered species in 2009. The utility has completed an environmental impact study regarding the discharge impact on the whale's habitat and has submitted it to the EPA for review. The potential loss of the waiver would require the facility to upgrade to full secondary treatment, albeit likely over an extended timeframe (assumed to be up to 20-30 years). While no indication exists that the utility will not receive a waiver, Fitch will continue to monitor regulatory developments and required timelines to assess the possible impact they could have on the utility's credit profile.
Rates are subject to final approval by the RCA through a rate case process. This is unusual for municipal water and wastewater utilities and has created timing delays and has forced occasional rate refunds in past years. Relations between the utility and regulators appear to have improved in recent years, but Fitch continues to view rate flexibility as limited due to the regulated rate environment. Nevertheless, the utility has managed the process well and received approval of a significant 11% rate increase in 2012. Rate increases have averaged a solid 8.8% over the past four years.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in the Revenue-Supported Rating Criteria, this action was informed by information from CreditScope and IHS Global Insights.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 12, 2012;
--'U.S. Water and Sewer Revenue Bond Rating Criteria', dated Aug. 10, 2011;
--'2012 Water and Sewer Medians', dated Dec. 8, 2011;
--'2012 Outlook: Water and Sewer Sector', dated Dec. 8, 2011.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. Water and Sewer Revenue Bond Rating Criteria
2012 Water and Sewer Medians
2012 Outlook: Water and Sewer Sector
Posted: July 18, 2012